Mistras Group, Inc. — Form 10-Q summary
Reporting period: Three and six months ended November 30, 2016; the financial statements are unaudited. The quarter is the second quarter of the company’s historical fiscal 2017. The company subsequently changed its fiscal year-end from May 31 to December 31, effective December 31, 2016.
Business context
Mistras provides asset-protection services, products and systems, including non-destructive testing, inspection and engineering, to energy, industrial and infrastructure customers. Its segments are Services, International, and Products and Systems. Management cited soft market conditions, with lower oil prices leading customers to curtail spending.
Financial performance
| Metric | Three months ended Nov. 30, 2016 | Year-over-year | Six months ended Nov. 30, 2016 | Year-over-year |
|---|---|---|---|---|
| Revenue | $176.6 million | Down 9% | $345.1 million | Down 8% |
| Gross profit / margin | $52.1 million / 29.5% | Margin up 0.3 percentage point | $102.1 million / 29.6% | Margin up 0.7 percentage point |
| Operating income / margin | $12.5 million / 7% | Down 36% | $23.7 million / 7% | Down 27% |
| Net income attributable to Mistras | $7.3 million | Down 36% | $13.9 million | Down 24% |
| Diluted EPS | $0.24 | Compared with $0.39 | $0.46 | Compared with $0.62 |
| Adjusted EBITDA (non-GAAP) | $21.6 million | Compared with $29.2 million | $42.8 million | Compared with $51.5 million |
Quarterly gross profit declined 9%, in line with the revenue decline, while operating expenses rose $2.2 million. For the six-month period, operating expenses increased $2.8 million, including higher corporate professional fees and personnel costs and acquisition-related items. Interest expense fell to $0.9 million for the quarter and $1.7 million year to date, primarily due to repayment of acquisition-related seller notes. The effective tax rate was approximately 37% for the quarter and 37% year to date, versus 38% year to date in the prior period.
Segments and material changes
- Services: Revenue fell 12% in the quarter and 10% year to date, reflecting organic declines partly offset by acquisitions. Quarterly gross margin declined to 25.8% from 27.3%, which management attributed mainly to lower volume and less favorable mix.
- International: Revenue grew 10% in the quarter and 6% year to date, with organic growth partly offset by unfavorable currency effects. Gross margin improved to 35.1% in the quarter from 31.5%, and to 34.1% year to date from 30.4%.
- Products and Systems: Revenue fell 14% in the quarter and 22% year to date on lower sales volume. Quarterly gross margin declined to 48.3% from 49.2%; the six-month margin rose to 49.2% from 47.1%.
- Oil and gas represented approximately 54% of quarterly revenue and 55% year-to-date. BP accounted for about 12% of quarterly revenue and 13% year-to-date; it also accounted for approximately 13% of six-month revenue and 12% of receivables. The top ten customers represented 37% of revenue in both the quarter and six-month period.
Cash flow, debt and liquidity
- Six-month operating cash flow was $26.0 million, versus $26.5 million. Capital expenditures were $7.4 million; the company reported free cash flow of $18.5 million, versus $18.3 million.
- Investing cash outflow was $15.0 million, including $8.2 million for acquisitions. Financing cash outflow was $4.3 million, including $7.0 million of share repurchases. Cash increased $5.1 million to $26.3 million.
- At November 30, cash was $26.3 million and current assets were $201.0 million versus current liabilities of $84.9 million. Total debt was $93.4 million, including $88.0 million under the revolving credit facility; capital lease obligations totaled about $17.0 million. The company reported $81.3 million of available borrowing capacity, after $5.7 million of outstanding letters of credit.
- The credit facility matures October 30, 2019, is secured by substantially all company assets and includes leverage and interest-coverage covenants. Mistras reported compliance with the covenants at period-end and said it believed available funding sources were sufficient for the foreseeable future.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance is provided in the filing. Management described demand conditions as soft, particularly amid lower oil prices and customer spending restraint; it also noted opportunities to hire and acquire businesses at reasonable valuations.
- The company completed three acquisitions during the six-month period for estimated total consideration of $10.3 million, including contingent consideration. Their post-acquisition contribution was approximately $1.7 million of revenue and less than $0.1 million of operating income.
- The $50 million share-repurchase plan had approximately $43.0 million remaining at November 30. The company repurchased about $7.0 million of shares during the quarter, including shares purchased from its CEO under a previously announced arrangement.
- A $6.3 million charge for a proposed employee class-action settlement had been recorded in fiscal 2016; the settlement received preliminary court approval in October 2016. Other proceedings include a pipeline radiography claim alleging approximately $6 million in damages and an aircraft-inspection-system claim alleging approximately $2.3 million; no reserves were recorded for these claims. The company also said it could not determine whether it had liability related to an EPA investigation at a California facility and had recorded no reserve.
- Foreign-currency translation losses were $7.2 million for the six months and reduced accumulated other comprehensive income. Management identified exchange-rate volatility, including the impact of the U.K.’s EU referendum, as a factor affecting cash translation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Services revenue and margins stabilize as customer spending responds to oil-market conditions.
- Whether International growth and margin gains persist, and how currency movements affect reported results and cash.
- Customer concentration and the effect of BP and oil-and-gas exposure on revenue and receivables.
- Available revolver capacity, covenant headroom and debt trends, including capital-lease obligations.
- Outcomes and potential financial exposure from the pipeline, aircraft-system and EPA matters, as well as final approval and payment of the employee settlement.
- Acquisition performance against contingent-consideration targets and the pace and funding of future repurchases.